Chapter 1. eFigure 5.10
Animated Graph
A Consumer's Indifference Curves
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You must read each slide, and complete any questions on the slide, in sequence.
Question 1.1
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Correct! Carlos’s budget constraint will shift out along the restaurant meal axis since the price of this good dropped and he can now afford more restaurant meals. He will now consume more restaurant meals, though we cannot say that his consumption will double (even though the price fell by half) since his choice of the quantity of restaurant meals will also depend on his preferences and the shape of his indifference curves.
Incorrect! Carlos’s budget constraint will shift out along the restaurant meal axis since the price of this good dropped and he can now afford more restaurant meals. He will now consume more restaurant meals, though we cannot say that his consumption will double (even though the price fell by half) since his choice of the quantity of restaurant meals will also depend on his preferences and the shape of his indifference curves.
Question 1.2
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Correct! Maintaining a constant level of purchasing power for Carlos allows him to purchase the same amount of utility as before. That is, he maximizes his utility with a point along U1. However, since Carlos faces the new price ratio, the slope of the indifference curve at this point will differ from the slope at point A. Since the price of restaurant meals has dropped, the slope of the tangency will be less indicating that the new tangency will occur below bundle A. When we isolate the substitution effect, bundle A is no longer affordable.
Incorrect! Maintaining a constant level of purchasing power for Carlos allows him to purchase the same amount of utility as before. That is, he maximizes his utility with a point along U1. However, since Carlos faces the new price ratio, the slope of the indifference curve at this point will differ from the slope at point A. Since the price of restaurant meals has dropped, the slope of the tangency will be less indicating that the new tangency will occur below bundle A. When we isolate the substitution effect, bundle A is no longer affordable.
Question 1.3
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Correct! The increase in income (from BC' to BC2) leads Carlos to increase his consumption of both rounds of golf and restaurant meals, indicating his income elasticity of demand is positive for both goods. These are normal goods. As his income increases, he purchases more of each good.
Incorrect! The increase in income (from BC'to BC2) leads Carlos to increase his consumption of both rounds of golf and restaurant meals, indicating his income elasticity of demand is positive for both goods. These are normal goods. As his income increases, he purchases more of each good.